The Jenga
Phenomenon
How eCommerce is reassembling industry
By Bob Bechek
and Chris Zook
The game of Jenga, named after the Swahili word for “construction,”
challenges each player to remove as many blocks as possible from a
cross-hatched tower of wooden beams and to use them to build
additional stories, all without causing the tower to crash. Although
the name connotes “building,” the game is about both disassembly
and reassembly, and as such forms a fitting analogy for the way
eCommerce is plucking out key blocks or leveling and rebuilding
towers in virtually every business. The question of the hour: will such
activity forever change the skyline of industry? The answer: absolutely.
A 1999 survey of North American CEOs published by The Economist
shows that 32% believe the Internet is redefining their businesses, and
another 42% believe it will within three years (See Figure 1). For some,
the Jenga phenomenon will mean obliterating traditional business towers
and rebuilding dot.com’s. For others, it will simply mean reconfiguring
their tower: running every block of their P&L statement through an
eCommerce grid. And for yet others it may be a system- or step-change
in between. The result will be a new industrial horizon. And the
winners in each business, as in the game of Jenga, will be those who
discern which blocks to move, when and where, to create an architecture
that will maximize long-term, profitable growth.
Bob Bechek is a director in
Bain & Company’s technology
practice. Chris Zook is a director
The Jenga Phenomenon: eCommerce is plucking out
in Bain’s Boston office and
key blocks of revenue or leveling and rebuilding towers
leads the firm’s strategy practice
worldwide. Both are advisors
to eCommerce companies.
of business in virtually every industry.
• Industrial heavyweight Ford Motor Co. is
Figure 1: Impact of Internet
Major Impact
Transformation
currently spending more than $300 million
on its Internet computing infrastructure to
Little/No Impact
80%
support applications geared toward personalized
car buying. The automaker’s goal is to use
70
65%
eCommerce to redefine itself as a consumer
60
business, from a manufacturer.
50%
50
• IBM, which has built a profitable wing in
42%
eCommerce consulting on its own Jenga
40
tower, may now be the biggest eBusiness of
32%
30
all. It expects its 1999 sales over the Internet
20
to grow fivefold to nearly $15 billion from
a year earlier. That’s more than Internet star
8%
10
Cisco’s total revenues.
3%
0
Inspecting the building blocks:
Now 3 Years
Now 3 Years
Now 3 Years
A survey of U.S. CEO’s indicates a firm conviction in the coming significant
impact of the Internet, though how this impact will manifest itself is unclear.
Where is your value chain vulnerable?
To identify the businesses or parts of a business
most vulnerable to the Jenga phenomenon,
Consider the following:
first, think about a sector’s entire value chain
• eBay, the first mover in Internet auctions,
including everything from customer acquisition
essentially transported the Jenga block of
to sourcing materials to product and service
classified advertising from newspapers to
design, product and service structuring, risk holding,
cyberspace. Today it is one of the most
and distribution and servicing. Within that value
profitable Internet pure plays: its 1998
chain think about where costs lie. (Figure 2)
earnings of $2.4 million are forecasted
to grow 10-fold by year-end 1999, while
purchasers of its fall 1998 IPO netted
Figure 2: Information intensity
one-year returns at a whopping 1463%.
• Big-box book retailer Barnes & Noble, slow
to seize potential for web-based aggregation
Typical
Function
Logistics
Percent of
Controllable Costs
Percent of
Function
2%
80%
of the fragmented book market, launched
Sales
10%
50%
barnesandnoble.com two years after Amazon.com
Marketing
10%
50%
built a new Jenga tower in the sector. Today,
Manufacturing/
Working Capital
50%
30%
although barnesandnoble.com’s customers rate
Sourcing
5%
80%
their shopping experience almost as highly as
Finance
10%
50%
Amazon.com’s, its customers spend 25% less
IT
10%
60%
on average than Amazon.com’s, and its annual
Human Resources
3%
40%
revenue trails at a tenth the market leader’s.
100%
B a i n & C o m p a n y, I n c .
Weighted
average:
The Jenga Phenomenon: How eCommerce is reassembling industry
43%
2
Over 40% of a typical company’s costs are related
The same eCommerce opportunity awaits where
to information and transaction activities. The
supply is highly fragmented. Chemdex Corp., an
biggest changes will occur where information
on-line aggregator in bioscience, has pulled together
is the largest part of the cost. Parts of businesses
170 suppliers, forming a one-stop shop of chemicals
where information is key, like sourcing, are being
and reagents sought by pharmaceutical firms,
transformed. Whole businesses where information
biotechnology companies, and academics.
is at the core, like travel, financial services, or
auctions, are aggressively being disassembled,
then reassembled on-line.
Though rarely sexy, on-line aggregators offer
immense potential for suppliers to lower marketing
and customer search and selection costs. A recent
Take, for example, the way traditional print classified
Bain study found that the more than 400 Internet
ads and job listings have found a solid niche in
intermediaries and aggregators doing business today
cyberspace through eBay. eBay, the world’s most
account for about half the value of Internet stocks.
active Internet auction site, which has spurred
Given the current rate of start-ups, about 1000
competition from the likes of Amazon.com,
such dot.coms will exist by 2001.
uBid.com, DealDeal.com and others, initially felt
like an irritation to newspaper publishers and
owners. But it became a high-volume, worldwide
competitor—attracting advertisers who might
otherwise stick with newsprint through low prices,
geographic reach and personalized, albeit virtual,
customer service. eBay hasn’t crashed the value
chain in auctions—you still need buyers, sellers,
products, and an auctioneer–it has just moved that
profitable segment of newspaper revenue on-line.
Finally, think about product standardization.
The more standardized the product, the greater
the potential savings to customers through webenabled search and selection. (Figure 3) For
example, customers in the market for hardcover
books garner a 67% savings on search and selection
costs through the Internet. At the other extreme,
purchasers of jet engines, which are highly
customized, save only about 3% searching on-line.
Still, non-standardized products, like jet engines
Related to the cost of information and transactions
is customer fragmentation. The more fragmented
a customer base, the more fragmented is customer
Figure 3: Search/selection costs
information. Such fragmentation makes a business
Hardcover
Fiction Book
Farm
Tractor
$28
$35,000
$6
$1,000
23%
3%
• Cost to customer
$2
$700
• Cost as a % of price
7%
2%
0.155%
67%
30%
3%
highly vulnerable to eCommerce aggregators.
Amazon.com, with its leadership in on-line book
Typical Price
Jet
Engine
$10,000,000
retailing, is a high-profile example of an Internet
Search/selection cost:
company that has capitalized on a fragmented
customer market. But there are many lowerprofile success stories—like NTE which aggregates
information on road haulage and allows hundreds of
transport companies to tap into available back-hauling.
• Cost to customer
• Cost as a % of price
$16,000*
0.160%
Web enabled process:
Web savings
$5,500*
*Amortized over all engines for a particular model of plane
B a i n & C o m p a n y, I n c .
The Jenga Phenomenon: How eCommerce is reassembling industry
3
or business computer systems, can net significant
In somewhat fragmented businesses that have
savings through another aspect of being wired: web-
average information/transaction costs and a mix
enabled configuration—linking customers directly to
of standardized and customized products, the key
the assembly process. And with the advent of smart
eCommerce opportunity lies in streamlining the Jenga
sites, whole Jenga towers of customization could
architecture. This is achieved by removing redundant
come crashing down. Imagineradio.com now lets a
blocks and exploding vertical integration. Personal
music lover pre-empt the radio station and customize
computers and medical systems fit this category, with
his or her listening menu for play on the Internet.
Dell a leader in using the web to remove duplication
in areas like sales and marketing and shipping. By
The Jenga Triage: Identifying space to eBuild
virtually connecting manufacturing to customers,
The Jenga approach allows for a quick triaging of
Dell has removed the cost blocks of marketing to
Internet threats and opportunities facing any business
value-added resellers and to retailers. The link has
(Figure 4). Where information/transaction costs and
also allowed vertically-integrated steps, like shipping
market fragmentation are low and products are
hardware to factories (for software loading) and to
customized, as in airplane engines or structured
customers, to function in parallel. (Figures 5 & 6)
finance, businesses should adopt a strategy of
productivity enhancement. They should remove
as many blocks from their expense statements as
they can and rebuild them on-line to cut costs.
Likewise, they should relocate blocks from their
income statements to the web to increase customer
loyalty. Such has been a secret to success for wellknown Internet companies like Microsoft and
Cisco, which handle supply sourcing, customer
interface, payroll, and expense all on-line.
Figure 4: Jenga “Triage”
The final triage, where fragmentation is extreme,
information/transaction costs are high, and products are
highly standardized, identifies space available for new
Jenga towers. These are the kind of greenfield towers
that aggregator NTE has built in road haulage, and
Chemdex in bioscience. But sometimes that space
becomes available through at least partly demolishing
old towers, then building state-of-the-art replacements,
as in web-based sales of books or air tickets.
Define value
chain/network
Establish fragmentation,
nature of information/
transactions cost, product
standardization
Category A
Category B
Category C
Strategy:
Examples:
B a i n & C o m p a n y, I n c .
The Jenga Phenomenon: How eCommerce is reassembling industry
4
Developing a blueprint:
Figure 5: Traditional computer manufacturer
Choosing eCommerce scenarios
Beyond triage, there is a continuum of possible
Sales/marketing (mfg.)
outcomes for leveraging eCommerce. The Jenga
Manufacturing
concept allows for scenario and economic modeling
Distribution
Sales
Sales/marketing (mfg.)
Warehouse
Marketing (retail)
VAR
Retailer
(sometimes)
Collection/
billing/purchase
Software
• Build to forecast
• Push system
• Layers of intermediaries
• Brick and motar
• Payment after
machine built
• No mfg./
customer link
to assess strategic options. (Figure 7) Let’s look in
depth at how these options are working themselves
out in one industry: financial services.
Renovating the building:
Internet services at Banc One
• 60-70 days inventory
• All activities in sequence, complexity
• Manufacturer standardized product
• Purchase at end of cycle
• Hard to segment customer base
Major banks like Columbus Ohio-based Banc
One and Charlotte N.C.-based First Union
have declared they are no longer counting on
acquisitions to fuel growth, but rather on getting
Figure 6: Dell
their eCommerce houses in order. Banc One’s
Sales/
marketing
strategy shows it doesn’t plan to change its business,
Order/
purchase/pay
JIT
manufacturing
Software load
(factory)
just to do more of it on-line. The bank’s more
than 110,000 Internet customers, who since 1998
have been able to open checking and savings
Ship to customer
accounts on the Web, will soon have a virtual fullservice branch. The bank plans a financial services
• 5 days inventory, 5 day cash conversion cycle
• Activities in sequence and parallel
• Customer standardized product
• Purchase at start of cycle (BTO)
• Easy to segment customer base
center for users of Excite’s Internet portal in a deal
that also gives Banc One the right to market its
products on Excite’s start page. In addition, Banc
One plans to turbo-charge its Internet transaction
Figure 7: Scenario and economic modeling
processing, a major growth area, through alliances
with First Data and Paymentech. An early signal
High
they are on the right track: when Banc One
C2
C1
Securities improved its web-site mid-1999, Gomez
Supply/Customer Base
Fragmentation
B2
System Change
New
markets
Advisors upgraded the bank’s on-line brokerage
rating to 15th place from 40th.
B1
One-Step Change
New
models
A
Low
The Jenga approach allows for quick
triaging of Internet threats and
Cisco
opportunities facing any business.
Low
Information/Transactions Cost
(% of total economics)
High
Product Standardization
B a i n & C o m p a n y, I n c .
The Jenga Phenomenon: How eCommerce is reassembling industry
5
Removing a floor: On-line stock trading
eCommerce has already played a significant role
in loosening the Jenga block of stock trading from
financial services. This segment, dominated by
The business horizon will change most
radically as major industry players like IBM,
Ford, UPS and Wal-Mart fully implement
their Internet strategies.
major brokerage houses, or “bulge-bracket firms,”
such as Merrill Lynch, has had a relatively deep
profit pool, with trading fees fixed relative to share
Building Greenfield:
volume traded, not stock price performance. It
Smart sites for research-intense products
was the perfect place for Internet companies to
dive. Already, on-line trading companies, led by
Schwab, Waterhouse, E*Trade, and Datek are
plucking off the customer segment of “active
traders,” particularly those focused on Internet
stocks, by offering convenient, discounted service.
Now several big brokers, including Merrill Lynch,
have launched a counterattack: an offer of on-line
trading at more competitive rates.
Finally, we can think about areas in financial
services where space is becoming available for
new Jenga towers. Products already exist today
that masterfully weave together a complexity of
information that could potentially be delivered
on-line. Research-intensive financial products like
derivatives, mutual funds, and loan syndications
come to mind. Just think about mutual fund
companies like Fidelity and Vanguard, the research
Overhauling the structure:
they own, and the way they use it to create attractive
Electronic crossing networks
investment bundles of stocks and bonds. How long
Electronic Crossing Networks (ECNs) like
Island, Instinet, and Archipelago, which create
communities of buyers and sellers of large volumes
of securities, are poised to heft an even weightier
customer segment—block traders—and they are
before someone builds an intelligent site that allows
investors to build their own mutual funds? Or
allows institutional customers to develop their
own derivatives? Or loan syndicates? Thus entire
financial product segments could move on-line.
doing so by changing the structure of institutional
Internet aggregators and smart site dot.coms are
share buying and selling. The ECNs have grown
making their marks on the industrial landscape and
rapidly because of their connections to the
seizing headlines. But the business horizon will
on-line brokers, their ability to facilitate after-
change most radically as major industry players like
hours trading, and their lower pricing. These very
IBM, Ford, UPS, and Wal-Mart fully implement
attributes will allow them to compete successfully
their Internet strategies. As these companies work
for the profitable business of anonymous block
out their Jenga triage, identify strategic options, and
trades, once easy profit for bulge-bracket firms
develop their blueprints for action, they need to
that charged institutional customers a premium
include both defensive and offensive strategy.
to leak their shares on the market. Now the
institutions themselves can anonymously leak
shares after hours, through an ECN.
B a i n & C o m p a n y, I n c .
The Jenga Phenomenon: How eCommerce is reassembling industry
6
Defending your Jenga tower:
Finally, through the process of Jenga triage, you’ll
Strategies to stymie eCommerce competitors
understand new models of business and get ahead
What should that defense be? How do you
prevent competitors from removing your Jenga
blocks? Above all, you must understand your
value chain and revenue sources and build barriers
where your profit pool is deepest. You can do
this by knowing where information transparency
would hurt you, and what information you can
control and deny to the system. If you hold the
key to inventories and pricing for a specific market,
lock the door.
of the curve–much as Dell understood the service
edge of allowing customers to configure their own
computer orders on-line. This means you may be
the first supplier to develop that smart site for
mutual funds, pre-empting distributors. Or you
may be a logistics specialist who can distribute any
standard product at low cost, the way drugstore.com
now picks and packs health and beauty products or
eToys.com ships playthings for on-line customers.
With the Internet poised to destabilize and rebuild
You can also defend overall market share by
launching pure plays that can poach customers
from your traditional channels before they defect
to an Internet competitor. Banc One chose this
route. In a strong defense against the pure-play
dot.coms emerging in segments like mortgage
lending and credit cards, Banc One launched
WingspanBank.com. Wingspan is a freestanding
all-Internet bank that can attract Banc One’s
customers with the lure of higher deposit rates
the Jenga of industry, any of us who believe today
that we can fully describe that decomposition and
recomposition are fooling ourselves. At the same
time, if we aren’t looking carefully at our building
blocks and our businesses’ potential for business
redesign given where our businesses fit in the Jenga
triage, we are foolhardy. Our tower of products
and services, customer segments and geographies
may come crashing down, leaving us bereft of
tools and materials for rebuilding.
that a virtual bank can offer.
But the best defense is often a strong offense.
To this end, you can block pure-play eCommerce
competition by getting the triage right, announcing
your own aggressive response to the Internet
You can block pure-play eCommerce
challenge, and scaring off venture capital funding
competition by getting the triage right,
for rival start-ups. In the process, you should
announcing your own aggressive response
identify what information you can release to the
to the Internet challenge and scaring off
system for your own gain. For example, an airline
venture capital funding for rival start ups.
that releases seat availability close to flight dates is
smart. It stands to add a last-minute fare for the
cost of one additional meal. In financial services,
the low-cost provider will gain by creating more
transparency of market information, e.g., for
management fees in mutual funds.
B a i n & C o m p a n y, I n c .
The Jenga Phenomenon: How eCommerce is reassembling industry
7
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strategy for sustainable results
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